For dividend investors, Altria Group (NYSE:MO) is an unparalleled success story, with the tobacco giant surviving decades of challenges to deliver consistent and growing dividend payments to its shareholders. Even with its past track record of defying skeptics, though, Altria still has not convinced everyone that it can weather the long-term trend away from smoking in the U.S., and the company has had to make smart moves to find growth opportunities elsewhere.
Fortunately, Altria has a solid executive team that is committed to finding ways to boost revenue and profits over time. As the new quarter begins, let's take a look at some of the initiatives management is focused on in their efforts to boost shareholder value (all quotes from CEO Marty Barrington).
"We are actually seeing a modest improvement, I think, in the economic situation for the adult tobacco consumer, although it remains a bit of a mixed bag. On balance, our view is that the adult tobacco consumer is feeling better about their economic situation and their economic future, and we expect some modest improvement in that over 2015."
One thing that investors need to remember about Altria is that smokers have to be able to afford cigarettes in order to support their habit. When the economy was in recession back in 2008, Altria and other tobacco companies felt a lot of pressure as smokers downgraded to discount brands in an effort to economize where they could.
Now, though, economic conditions have improved, and that makes it easier for smokers to buy premium brands like Marlboro rather than settling for cheaper alternatives. If the recovery continues, it should enable Altria to keep demand high even if it keeps pushing prices upward to offset the impact of falling sales volumes.
"[Customers] have more choices today, and so there's some movement [among products] there, but these things best, I think, are evaluated over time. ... It speaks, I think, first to the wisdom of having a total tobacco platform. So as adult tobacco consumers move within these categories, Altria is well-positioned to offer them premium brands with great margin structure."
Across the industry, tobacco companies have worked at diversifying their product lines, incorporating smokeless tobacco and e-cigarettes into the mix. Altria's strategy has been to have market-leading products in all areas of interest to tobacco enthusiasts. By focusing on developing brand loyalty, Altria hopes that it can retain its strong margins and capture customers regardless of their particular product preferences.
"Historically, we have not called out gas prices as one of the principal drivers of consumer behavior, [but] the way that gasoline prices have gone down so precipitously has obviously had a bigger effect on the consumer. ... The C stores [are] seeing better traffic, and I don't think there's any question that it's contributing to consumers feeling better about their economic situation."
Falling gas prices have generally added to disposable income, which many consumer goods companies have seen help their overall results. But Altria's insight is that with many cigarette sales happening at gas station convenience stores, the tobacco industry is one of the most immediate beneficiaries of cheap gasoline. Whether that turns into a long-term trend remains to be seen, but for now, Altria is reaping the rewards from customers who have more cash in their pockets than they did before the plunge in gas prices.
"With respect to Nu Mark, our belief is that it is an interesting enough category for us to participate in and to aspire to have leadership in. That is leadership that will be achieved over the long-term and for the long-term, which is why we use these words about financially disciplined and over time. We want to participate there. We believe Nu Mark had a very good year."
It was not that long ago that Altria was an also-ran in the e-cigarette market, with competitors having jumped at the opportunity and gained a big lead in the space. But Nu Mark has pushed hard to catch up, and its MarkTen brand is now available in 130,000 retail locations across the nation. Combined with last year's acquisition of Green Smoke, Altria is becoming a bigger force in the vapor and tobacco alternative market, and that bodes well for serving customers of all sorts in the future.
"Marlboro is a fantastic product for adult smokers that comes with decades of leadership, with lots of innovation and with lots of offerings for people who are in the category, and it has consistently grown its share over decades. We are the stewards of this brand, and we pay a good deal of attention to Marlboro. That speaks both to the product's function and to its equity, and that's been Marlboro's story."
In many ways, Marlboro is Altria, at least in the sense of its being the company's most valuable brand asset. With so much tied to the iconic brand, Altria has to support Marlboro no matter what. It is good to see company management recognize this fact, and in fighting efforts to eliminate branding from cigarette packs, Altria is working to preserve Marlboro's value for years to come.
Altria Group relies on the continued efforts of its management to keep climbing, and so far, the company has done a good job of preserving the success story that has given investors such attractive returns over the years. Despite its challenges, Altria remains on course to keep delivering long-term success well into the future.